Macro Chapter 11
If nominal GDP increases, what might be the cause of this increase? If nominal GDP increases, this could be caused by: (Select all that apply.) A. An increase in the price level B. A decrease in the price level C. An increase in real GDP D. Deflation Given the following information, what is the growth rate of nominal GDP? Y 0 real GDP = $1500 (in millions) Y 1 real GDP = $1800 (in millions) Y 0 price level = 110 Y 1 price level = 115 The growth rate of nominal GDP is _________%.
A. An increase in the price level C. An increase in real GDP 24.55%
Bitcoins are defined as a "peer-to-peer decentralized digital currency." The supply of bitcoins is not controlled by the government or any other central agency. The value of each bitcoin is determined on the basis of supply and demand and is defined in terms of dollars. New bitcoins can be generated through a process called "mining." However, new bitcoins will not be created once there are a total of 21 million bitcoins in existence. Some commentators feel that bitcoins can eventually replace most of the major currencies in the world. What are some of the issues with bitcoins replacing major currencies? (Check all that apply.) A. Fiat money is generally worthless without a government decree that it is legal tender. B. Bitcoin deposits are not insured by the government. C. The value of a bitcoin is highly volatile and so people that hold them may lose money. D. Bitcoins are nonconvertible and therefore not acceptable for most types of purchases. Traditional currencies are controlled by central banks. What is a potential problem of restricting the creation of bitcoins to a total of 21 million bitcoins? A. The central bank loses the ability to generate revenues from seignorage. B. There is a limit to the number of transactions that can occur in the economies that would use them. C. Monetary authorities cannot undertake expansionary monetary policy to stimulate the economy during recessions. D. When bitcoins are stolen, the number of bitcoins in circulation declines and the central bank cannot replace them.
A. Fiat money is generally worthless without a government decree that it is legal tender. B. Bitcoin deposits are not insured by the government. C. The value of a bitcoin is highly volatile and so people that hold them may lose money. C. Monetary authorities cannot undertake expansionary monetary policy to stimulate the economy during recessions.
What are the two models that are used to describe inflationary expectations? (Check only two.) A. Rational expectations. B. Real expectations. C. Adaptive expectations. D. Belief-formed expectations.
A. Rational expectations. C. Adaptive expectations.
Which of the following are possible benefits of inflation? (Check all that apply.) A. Revenue is generated to the government when it prints money. B. There may be a reduction in real wages. C. The introduction of price controls could make goods more affordable. D. There may be a reduction in the real interest rate. E. There are no benefits to inflation.
A. Revenue is generated to the government when it prints money. B. There may be a reduction in real wages. D. There may be a reduction in the real interest rate.
Money makes a variety of economic transactions possible. In the following three situations, determine whether money is involved in the transaction. In prison camps during World War II, and in some prisons today, cigarettes circulate among prisoners. For example, an iPod might cost two cartons of cigarettes, whereas a magazine might only cost two cigarettes. Which functions of money are cigarettes fulfilling in this case? (Check all that apply.) A. Store of value. B. Fiat money. C. Unit of account. D. Medium of exchange. Over the last 50 years, credit cards have become an increasingly popular way for people to purchase goods and services. Are credit cards money? A. No, because not everyone accepts credit cards. B. Yes, because you are spending your money since you have to pay the credit card company back. C. No, because you credit cards are not assets. D. Yes, because they fulfill all the functions of money. Almost every day, many people sign their names to little pieces of paper called checks, which are then accepted in exchange for goods and services. Do these checks constitute money? A. Yes, because they fulfill all three functions of money. B. No, because checks, unlike currency, do not have "legal tender" printed on them. C. Yes, because the check authorizes the person who receives it to get money out of the bank account. D. No, because checks simply represent a means of access to money, not money itself.
A. Store of value. C. Unit of account. D. Medium of exchange. C. No, because you credit cards are not assets. D. No, because checks simply represent a means of access to money, not money itself.
Barter is a method of exchange whereby goods or services are traded directly for other goods or services without the use of money or any other medium of exchange. Suppose you need to get your house painted. You register with a barter Web site and want to offer your car cleaning services to someone who will paint your house in return. What are the problems you are likely to encounter? (Check all that apply.) A. You might find it difficult to find someone who needs you to wash his car and is willing to paint your house in return. B. It might be difficult to agree on how many car washes is equivalent to painting a house. C. The house painter may not do a good job since he isn't being paid in money. D. Inflation would create problems when there is a time difference in the provision of services. E. It may take a lot of time to negotiate and finally settle on a deal that you both find fair. Some barter Web sites allow the use of "barter dollars." The registration fee that you pay to a barter Web site gets converted into barter dollars that can be exchanged with other users to buy goods and services. Would the use of barter dollars resolve the problems you identified above? A. Yes, because you could both pay and be paid in "barter dollars." B. No, because "barter dollars" are not legal tender. C. Yes, because the "barter dollars" would not be convertible. D. No, because during a recession, the central bank would have no ability to stimulate the economy.
A. You might find it difficult to find someone who needs you to wash his car and is willing to paint your house in return. B. It might be difficult to agree on how many car washes is equivalent to painting a house. E. It may take a lot of time to negotiate and finally settle on a deal that you both find fair. A. Yes, because you could both pay and be paid in "barter dollars."
An open market operation is ____________. A. an exchange between a private bank and the Federal Reserve where the Fed buys or sells government bonds to private banks. B. an exchange between private banks where the banks buy or sell bonds to each other. C. where a bank borrows reserves or bonds from the Federal Reserve's discount window. D. the process of selling Fed-issued IOUs between banks. The Federal Reserve conducts open market operations when it wants to ____________. A. change the level of reserves it holds for banks. B. influence the discount rate. C. change the liquidity levels of banks. D. influence the federal funds rate. When the Fed sells government bonds to private banks, it ______________ the electronic reserves that banks hold. When the Fed buys government bonds from private banks, it _____________ the electronic reserves that banks hold.
A. an exchange between a private bank and the Federal Reserve where the Fed buys or sells government bonds to private banks. D. influence the federal funds rate. decreases increases
Banks usually meet their liquidity needs by ____________. A. borrowing from each other in the federal funds market. B. borrowing from the Federal Reserve's discount window. C. selling equity or stock. D. selling bonds to either the public or to the Federal Reserve.
A. borrowing from each other in the federal funds market.
Seignorage is the ____________. A. difference between the cost of printing paper money and the value of the goods and services that the government can purchase with the newly printed money. B. increase in the price level when a government prints money to fund its budget deficit. C. difference between the amount of money a government prints and the tax revenue that the government brings in from individuals and businesses. D. costs that governments incur in printing money and minting coins.
A. difference between the cost of printing paper money and the value of the goods and services that the government can purchase with the newly printed money.
Convertibility is the ability to convert ____________. A. fiat money into a physical commodity, such as gold. B. a physical commodity such as gold into fiat money. C. a cryptocurrency into fiat money. D. one nation's currency into another nation's currency.
A. fiat money into a physical commodity, such as gold.
Recall the discussion in the chapter about the "quantity theory of money." The quantity theory of money assumes that ____________. A. the ratio of money supply to nominal GDP is exactly constant. B. in the long run, velocity fluctuates with real GDP. C. in the short run, velocity is stable. D. the ratio of money supply to nominal GDP grows over time. This implies that if the money supply grows by 10 percent, then nominal GDP needs to grow by _____________% . It follows that the growth rate of money supply and the growth rate of nominal GDP will be the same. In this case, inflation is ____________. A. equal to the gap between the growth rate of money supply and the growth rate of real GDP. B. equal to the growth rate of real GDP. C. always zero. D. always greater than the growth rate of money supply. If the growth rate of money supply is larger than the growth rate of real GDP, the inflation rate is _____________. Are the predictions of the quantity theory of money borne out by historical data? A. No, the data show many outliers such as Argentina, Nicaragua, and Poland. B. Yes, the long-run data show a one-for-one growth rate of money supply and inflation. C. No, countries that experience hyperinflation break the relationship between the growth rate of money supply and inflation. D. Yes, the short-run data show a one-for-one growth rate of money supply and inflation.
A. the ratio of money supply to nominal GDP is exactly constant. 10 percent A. equal to the gap between the growth rate of money supply and the growth rate of real GDP. positive B. Yes, the long-run data show a one-for-one growth rate of money supply and inflation.
How does fiat money differ from commodities like gold and silver that were used as money? A. It is more resistant to hyperinflationary forces than commodity money. B. Fiat money is intrinsically worthless, whereas gold and silver have intrinsic value. C. The unit of account measures can be tuned better to the prices in the economy. D. Fiat money is easier to carry around than gold or silver coins. If fiat money is intrinsically worthless, then why is it valuable? A. It is the most useful type of money. B. Fiat money is always convertible to gold or silver reserves. C. The government earns seignorage revenue from it. D. Fiat money is used as legal tender by government decree and other people will accept it as payment for transactions.
B. Fiat money is intrinsically worthless, whereas gold and silver have intrinsic value. D. Fiat money is used as legal tender by government decree and other people will accept it as payment for transactions.
How does the Federal Reserve obtain a particular value for the federal funds rate? A. It finds the point on the supply curve that corresponds to that federal funds rate and makes available the exact level of reserves associated with that point on the supply curve. B. It finds the point on the demand curve that corresponds to that federal funds rate and makes available the exact level of reserves associated with that point on the demand curve. C. It finds the point on the supply curve that corresponds to that federal funds rate and then shifts the demand curve so that the equilibrium rate is the one chosen. D. It electronically changes the amount of reserves that private banks hold at the Fed.
B. It finds the point on the demand curve that corresponds to that federal funds rate and makes available the exact level of reserves associated with that point on the demand curve.
What are the costs associated with inflation? (Check all that apply.) A. Indexing of pensions and mortgages to inflation. B. Logistical costs related to the need to frequently change prices. C. Stagnant real wages. D. Uncertainty about the aggregate price level, which can distort prices and make planning difficult. E. Unproductive policies such as price controls, which may be due to voter dissatisfaction.
B. Logistical costs related to the need to frequently change prices. D. Uncertainty about the aggregate price level, which can distort prices and make planning difficult. E. Unproductive policies such as price controls, which may be due to voter dissatisfaction.
What are the functions of money in a modern economy? (Check all that apply.) A. Store of gold or silver. B. Store of value. C. Unit of account. D. Medium of exchange.
B. Store of value. C. Unit of account. D. Medium of exchange.
According to the quantity theory of money, the inflation rate is A. the ratio of money supply to nominal GDP. B. the gap between the growth rate of money supply and the growth rate of real GDP. C. the gap between the nominal and real interest rates. D. the gap between the growth rate of money supply and the growth rate of nominal GDP. If the inflation rate is negative, what must be true? A. The growth rate of nominal GDP less than the growth rate of money supply. B. The growth rate of real GDP greater than the growth rate of money supply. C. The growth rate of nominal GDP greater than the growth rate of money supply. D. The growth rate of real GDP less than the growth rate of money supply. (if positive)
B. the gap between the growth rate of money supply and the growth rate of real GDP. B. The growth rate of real GDP greater than the growth rate of money supply.
The Federal Reserve influences the long-run real interest rate through ____________. A. adjustments to expected inflation. B. the short-term federal funds rate. C. the long-term federal funds rate. D. the discount rate.
B. the short-term federal funds rate.
Imagine that the chairperson of the Federal Reserve announced that, as of the following day, all currency in circulation in the United States would be worth 10 times its face denomination. For example, a $10 bill would be worth $100; a $100 bill would be worth $1,000, etc. Furthermore, the balance in all checking and savings accounts is to be multiplied by 10 as will the balance of all outstanding debts. So, if you have $500 in your checking account, as of the following day, your balance would be $5,000, etc. Would you actually be 10 times better off on the day the announcement took effect? A. No, because the velocity of money would stay constant. B. No, because all prices would increase by a factor of 10 as well, keeping the real value of your money constant. C. Yes, because the real value of your money would increase by approximately a factor of 10. D. Yes, because you would now be able to buy 10 times as much in goods and services.
B. No, because all prices would increase by a factor of 10 as well, keeping the real value of your money constant.
The real wage is the ____________. A. wage that would prevail in the absence of government intervention, such as a minimum wage. B. inflation-adjusted wage. C. price level divided by the nominal wage. D. amount of money an individual keeps after paying all taxes. What is the significance of the real wage as it relates to inflation? A. The real wage drives inflation, and so a decrease in the real wage will decrease inflation and the overall price level in the economy. B. Since an increase in inflation increases the real wage that firms must pay, firms are less willing to hire workers, thus depressing economic activity. C. The real wage is linked to the real interest rate, and so a change in the real wage will impact business investment. D. Since an increase in inflation reduces the real wage that firms must pay, firms are more willing to hire workers, thus stimulating economic activity.
B. inflation-adjusted wage. D. Since an increase in inflation reduces the real wage that firms must pay, firms are more willing to hire workers, thus stimulating economic activity.
Which of the following would be true for the banking system if there were no government regulation? A. Bank owners would bear all the risks of bank failures. B. The money supply would never fluctuate. C. The money supply would be determined by individual banks. D. Borrowers would bear all the risks of bank failures.
C. The money supply would be determined by individual banks.
Inflation is the ____________. A. growth rate of nominal GDP. B. ratio of money supply to nominal GDP. C. growth rate of the overall price level in the economy. D. growth rate of real GDP. Deflation is ____________. A. a decrease in the inflation rate. B. a decrease in nominal GDP. C. a decrease in real GDP. D. the rate of decrease of the overall price level in the economy. Hyperinflation is ____________. A. a doubling of the price level within three years. B. a doubling of the price level within three months. C. inflation rates that fluctuate by +/minus50 percent. D. inflation rates in excess of 50 percent per month.
C. growth rate of the overall price level in the economy. D. the rate of decrease of the overall price level in the economy. A. a doubling of the price level within three years.
The federal funds rate is the ____________. A. interest rate in the federal funds market where banks obtain overnight loans of reserves from the Federal Reserve. B. interest rate at the discount window where banks obtain overnight loans of reserves from the Federal Reserve. C. interest rate in the federal funds market where banks obtain overnight loans of reserves from one another. D. interest rate at the discount window where banks obtain overnight loans of reserves from one another. The funds that are lent in this market are ____________. A. withdrawals at the Federal Reserve Bank. B. reserves at the Federal Reserve Bank. C. deposits at the lending bank. D. seignorage for the Federal Reserve. The factors that would shift the demand curve for reserves include ____________. (Check all that apply.) A. a changing deposit base. B. an economic expansion or contraction. C. an anticipated change in inflation. D. the federal funds rate. E. anticipated liquidity shocks.
C. interest rate in the federal funds market where banks obtain overnight loans of reserves from one another. B. reserves at the Federal Reserve Bank. A. a changing deposit base. B. an economic expansion or contraction. E. anticipated liquidity shocks.
Fiat money is ____________. A. a currency that is protected with computer codes. B. a currency that is not convertible to a physical commodity. C. something that is used as legal tender by government decree and is not backed by a physical commodity. D. something that is used as legal tender that is backed by a physical commodity like gold or silver.
C. something that is used as legal tender by government decree and is not backed by a physical commodity.
A central bank is the government institution ____________. A. that lends money to the government. B. responsible for printing money. C. that runs a country's monetary system. D. that runs a country's fiscal system. The functions of a central bank are to ____________. (Check all that apply.) A. lend money to large multinational corporations. B. indirectly control the money supply. C. directly control the money supply. D. regulate the government's spending. E. control certain key interest rates. F. monitor financial institutions.
C. that runs a country's monetary system B. indirectly control the money supply. E. control certain key interest rates. F. monitor financial institutions.
According to the BBC, inflation in the country of Zimbabwe reached an annualized rate of 231,000,000 percent in October of 2008. Prices got so high that in January of 2009, the country's central bank - the Reserve Bank of Zimbabwe - introduced a $100 trillion bill. Use the following link to read the summary of Zimbabwe's experience with hyperinflation in Wikipedia: (http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe) What was the root cause of hyperinflation in Zimbabwe? A. The government confiscated private farms from white landowners. B. The central bank abandoned the Zimbabwean dollar. C. Zimbabwe adopted the IMF's Economic Structural Adjustment Programme. D. There was an increase in the money supply in excess of the growth rate of real GDP. What were some of the costs of the hyperinflation? (Check all that apply.) A. People spent time exchanging money multiple times per day. B. There were increased costs from differential pricing between the black market and the official market. C. Price controls were applied. D. Businesses were forced to adjust prices several times per day. What were some of the benefits? (Check all that apply.) A. The government gained the seignorage. B. Businesses were allowed to introduce differential pricing, such as charging different prices for mini-bus rides. C. Most citizens became trillionaires. D. The black market that developed sold goods at lower prices than the official markets. What were some of the adaptations that the country adopted to cope with the situation? (Check all that apply.) A. The use of the black market for many transactions. B. Redenominations of the Zimbabwean dollar. C. The adoption of fiscal restraint by the government. D. The use of foreign currencies for transactions.
D. There was an increase in the money supply in excess of the growth rate of real GDP. A. People spent time exchanging money multiple times per day. C. Price controls were applied. D. Businesses were forced to adjust prices several times per day. A. The government gained the seignorage. A. The use of the black market for many transactions. B. Redenominations of the Zimbabwean dollar. D. The use of foreign currencies for transactions.
Banks usually meet their liquidity needs by ____________. A. selling bonds to either the public or to the Federal Reserve. B. selling equity or stock. C. borrowing from the Federal Reserve's discount window. D. borrowing from each other in the federal funds market.
D. borrowing from each other in the federal funds market.
According to the quantity theory of money, ____________. A. in the short run, the growth in the money supply is directly related to the inflation rate. B. the inflation rate will stay constant over the long run. C. the ratio of the money supply to nominal GDP is constantly fluctuating. D. in the long run, the growth in the money supply is directly related to the inflation rate. Which of the following equations is the equation for velocity in the quantity theory of money? A. Nominal GDP / Money Supply B. Money Supply/ Nominal GDP C. Real GDP / Money Supply D. Inflation Rate / Money Supply
D. in the long run, the growth in the money supply is directly related to the inflation rate. A. Nominal GDP / Money Supply
Hyperinflation is most likely caused by ____________. A. an increase in the prices of everyday goods. B. recessions or depressions. C. large budget deficits financed by borrowing from the public. D. large budget deficits financed by printing more money.
D. large budget deficits financed by printing more money.
____________ GDP is the total value of production (final goods and services) using current prices. Consider an illustrative economy that produces luxury pens. Assume that in 2013 this economy produced 20 luxury pens at a market price of $200 per pen. In 2014, the number of luxury pens produced remains the same but the market price has increased to $300 per pen. If 2013 is the base year, the real GDP in 2014 is $___________. The nominal GDP in 2014 has increased by ______ percent from what it was the year before. (Round your answer to two decimal places.) Which of the following statements are true regarding the quantity theory of money? (Check all that apply.) A. Growth rate of money supply = Growth rate of nominal GDP. B. Growth rate of money supply = Inflation rate + Growth rate of real GDP. C. Growth rate of money supply = Growth rate of nominal GDP - Inflation rate. D. Growth rate of money supply = Growth rate of real GDP.
Nominal $ 4,000 increased; 50 percent A. Growth rate of money supply = Growth rate of nominal GDP. B. Growth rate of money supply = Inflation rate + Growth rate of real GDP.
According to the quantity theory of money, what must the growth rate of the money supply be given the following information? · The growth rate of real GDP is 2.3%. · The growth rate of nominal GDP is 5.1%. · The nominal interest rate is 4.0%. · The real interest rate is 1.2%. · The money supply (M2) is $8,591 (in billions) According to the quantity theory of money, the growth rate of the money supply must be ____%. According to the quantity theory of money, what is the inflation rate? Use the information given above and calculate the inflation rate. According to the quantity theory of money, the inflation rate is ____%.
The growth rates of the money supply and nominal GDP must be equal >5.1 % Inflation rate = 5.1% - 2.3% = 2.8% >2.8%
The chapter discusses different models of how people form their expectations regarding inflation. Consider the following two investors, who are trying to forecast what inflation will be for next year. Sean reasons as follows: "Inflation was 2.5 percent last year. Therefore, I think it is likely to be 2.5 percent this year." Carlos, on the other hand, thinks this way: "The economy has recovered from recession sufficiently that inflationary pressures are likely to build. Likewise, a weaker dollar means that imports are going to be more expensive. I don't think the Fed will risk slowing the recovery and raising unemployment by raising interest rates to fight inflation. So, in light of all these factors, I expect inflation to increase to 5 percent next year." How would you best describe how each investor is forming his expectations of inflation? Sean is forming his forecast based on the _____________________ model of inflation and Carlos is forming his forecast based on the ________________________ model of inflation. What are possible criticisms of the way each investor is forming his expectations? Economists might argue that A. Sean is looking back too far, and Carlos is ignoring the past. B. Sean cannot be as good at understanding how the economy works as he thinks he is, and Carlos is not maximally rational. C. Sean is not maximally rational, and Carlos cannot be as good at understanding how the economy works as he thinks he is. D. Sean is not looking back far enough, and Carlos is overconfident in his understanding of how the economy works.
adaptive expectations; rational expectations C. Sean is not maximally rational, and Carlos cannot be as good at understanding how the economy works as he thinks he is.
Banks obtain overnight loans of reserves from one another through the __________________________. When bank A has $25 billion in reserves and loans $2 billion of reserves to another bank, the net quantity of reserves demanded by these banks is $___________ billion. A higher federal funds rate ______________ the cost of holding reserves and ____________ the quantity of reserves demanded by optimizing banks.
federal funds market (25 billion - 2 billion) + 2 billion =25 billion >$ 25 billion increases; reduces
If a country enacts fiscal policy to alleviate a recession by lowering taxes and increasing government spending, this will likely ___________ the deficit and ___________ the risk of inflation.
increase; increase
By affecting certain key interest rates, the Fed can indirectly control the money ________. The Fed's dual mandate is to maintain ______ levels of inflation while allowing for sustainable levels of ___________.
supply low; GDP growth